The
Rule
of 72 is a handy way to figure out how many
years it takes for your money to double if you invest it at
a fixed rate of interest, and let compound
interest work
for you. It’s easy to do, and it’s what people did before they
had hand-held calculators.
What you do is divide
72 by the expected interest rate.
The number you get is how many years it will take for
your money to double.
The following examples illustrate the
power of compounding interest and giving your money time to
grow.
We’re assuming for sake of example that the
interest is compounded annually (once a year). Compound interest means the return you receive on your
initial investment remains in your account so you earn
interest on your interest.
Let's imagine you have $1,000
earning 4% interest. Using the Rule of 72, you divide 72 by 4, and get 18.
In 18 years, you’ll have $2,000.
Instead of 4% interest, let’s say you're earning 6%
interest, then it’ll take only 12 years to double your
money. At 10%
interest, it’ll be 7.2 years.
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The
Rule of 72 gets even more useful if you think in terms of
your money doubling and redoubling.
If
it took 18 years for your money to double at 4%, how long
until it doubles again?
According to the Rule of 72, if you
have $2,000 in 18 years, then you’ll have $4,000 in another
eighteen years, $8,000 in another eighteen years, etc. You can
quickly see how your money can double multiple times -- a
$1,000 investment can grow to $16,000 by doubling four times
(a 16-fold increase!).
You can also use the Rule of 72
to estimate the interest rate you need in order to double
your money in a certain number of years.
Simply divide 72 by the number of years to get the
interest rate you must earn in order to reach your goal.
Another
use for The
Rule of 72 is show how the difference of just a few points in an
interest rate can make a big difference in how quickly your money grows.
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